IRS rescinds two-year limitation period for equitable innocent spouse relief

The IRS in Notice 2011-70, 2011-32 IRB has just rescinded its position on a timeline within which to request equitable innocent spouse relief.  It will no longer deny an individual's request for equitable relief under Code Sec 6015(f) based upon it having  been filed more than two years after IRS first acted to collect the liability from the individual.  There are also transition rules for pending requests for relief, denied requests, and cases in litigation or where the litigation is final.

Background. Each spouse is jointly and severally liable for the tax, interest, and penalties stemming from a jointly filed income tax return. Code Sec 6015(f) allows relief to a requesting spouse if, among other conditions, taking into account all the facts and circumstances, it is inequitable to hold the individual liable.
To be eligible for relief under Code Sec 6015(b) (innocent spouse relief) or  Code Sec. 6015(c) (separate liability relief), the Code explicitly provides that the requesting spouse must elect relief not later than the date that is two years after the date that IRS has begun collection activities with respect to the individual making the election. ( Code Sec. 6015(b)(1)(E) , Code Sec. 6015(c)(3)(B) ) However, no such limitation is written in Code Sec. 6015(f) . The IRS had originally issued a regulation Reg. § 1.6015-5(b)(1)  that states that the two year rule also applies for equitable requests.
The Tax Court had repeatedly invalidated the regulation but the Third, Fourth, and Seventh Circuits have rejected the Tax Court's position holding the Regulation to be valid.
Until the Regulation is formally changed, taxpayers can rely on the IRS Notice.
The door is open for existing cases as well as previously denied cases to refile.
If however, payment was already made, no relief will be available.  
Innocent spouses rejoice!

Sole shareholder can receive employment agreement payment on sale of business rather than corporation because shareholder sold his good will

In H&M, Inc. v. Commissioner, T.C. Memo 2012-290 (2012), the United States Tax Court determined that where a corporation sold its insurance brokerage while its sole shareholder entered into employment with the buyer, the compensation under the employment agreement was not a disguised purchase price payment to the selling corporation.  The Tax Court determined that the shareholder's personal ability and other individualistic qualities were not a corporate asset (goodwill) that should be taken into account as part of the purchase price.

By way of background, the sale of a business often involves the transfer of intangible assets.  These assets can constitute the goodwill of the business, a corporate asset and the shareholder's agreement not to compete with the buyer along with an arrangement for the shareholder to provide future services.  Two seminal Tax Court cases permit payments to shareholders rather than corporations thereby precluding double tax treatment.  Martin Ice Cream Co v. Comm., 110 T.C. 189 (1998), (personal relationships of a shareholder-employee aren't corporate assets where the employee has no employment contract with the corporation); MacDonald v. Comm., 3 T.C. 720 (1944) (a corporation did not have any goodwill in the shareholder's personal ability, business acquaintanceship, and other individualistic qualities).

The Tax Court in H&M held that, in light of the shareholder’s personal relationships, his experience in running all facets of an insurance agency and his responsibilities as manager of the bank's insurance agency, the compensation that the bank paid him was reasonable. The employment agreement contained an extensive list of duties that the shareholder’s was required to perform. Not only was the shareholder an insurance salesman, he also had significant management and bookkeeping responsibilities. He went from working around 40 hours per week before the sale to double that afterward.  As such, the H&M Court found the case to be akin to MacDonald and Martin Ice Cream Co. The Court specifically found that when customers came to the shareholder’s agency, they came to buy from him. It was the shareholder’s name and his reputation that brought them there. The Court further found that he had no agreement with H&M at the time of its sale that prevented him from taking his relationships, reputation, and skill elsewhere.

The H&M case provides ammunition to attorneys who structure transactions to avoid double tax on the sale by the selling shareholder entering into an employment agreement with the purchaser.